Academic Session 2025-26

ODD Semester Jul-Dec 2025

UNIVERSITY SCHOOL OF BUSINESS

BBA
SEMESTER- 4TH
MANAGEMENT ACCOUNTING
(24BAT-202)
Unit No. 1 Chapter No. 2 Lecture No. 5
Topic : ___Cost Classification
Faculty Name: Akanksha Kaushik
E_Code: E-5340 Designation: Assistant Professor
 Learning Objectives
1

• Understand categories such as fixed, variable, direct, indirect, and semi-variable

costs.
• Learn to classify costs by function, behavior, traceability, and relevance to
decision-making.
• Use appropriate cost categories for budgeting, pricing, and cost control.
 Recap of Previous Lecture
2

• Management accounting is the process of preparing

management reports and accounts that provide accurate
and timely financial and statistical information required
by managers to make day-to-day and short-term
decisions.
 Cost Classification
3

1. Types of Costs
.

Figure-1 : https://www.wallstreetmojo.com/cost-
classification/
 Cost Classification
4

• Role Management Accounting Plays in

Decision Making

https://www.shiksha.com/online-courses/articles/
classification-of-costs-a-complete-guide/
 Contents
CLASSIFICATION OF COSTS
By time (Historical, Pre-determined).
By nature or elements (Material, Labour and Overhead).
By degree of traceability to the product (Direct, Indirect).
Association with the product (Product, Period).
By Changes in activity or volume (Fixed, Variable, Semi-variable).
By function (Manufacturing, Administrative, Selling, Research and development, Pre-
production).
Relationship with accounting period (Capital, Revenue).
Controllability (Controllable, Non-controllable).
Cost for analytical and decision-making purposes (Opportunity, Sunk, Differential, Joint,
Common, Imputed, Out-of-pocket, Marginal, Uniform, Replacement).
Others (Conversion, Traceable, Normal, Avoidable, Unavoidable, Total) 6
By Degree of Traceability to the Products
Cost can be distinguished as direct and indirect.
Direct Costs: The direct costs are those which can be easily traceable to a product or costing unit or cost
center or some specific activity, e.g. cost of wood for making furniture. It is also called traceable cost.
Indirect Costs : The indirect costs are difficult to trace to a single product or it is uneconomic to do so.
They are common to several products, e.g. salary of a factory manager. It is also called common costs.
 Costs may be direct or indirect with respect to a particular division or department. For example, all
the costs incurred in the Power House are indirect as far as the main product is concerned but as
regards the Power House itself, the fuel cost or supervisory salaries are direct. It is necessary to
know the purpose for which cost is being ascertained and whether it is being associated with a
product, department or some activity.
 Direct cost can be allocated directly to costing unit or cost center. Whereas Indirect costs have to
be apportioned to different products, if appropriate measurement techniques are not available.
These may involve some formula or base which may not be totally correct or exact.
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 Product costs and Period costs

Product Costs: Product costs are those which are traceable to the product and
included in inventory values. In a manufacturing concern it comprises the cost of
direct materials, direct labour and manufacturing overheads.
Period Costs: Period costs are incurred on the basis of time such as rent, salaries,
etc., include many selling and administrative costs essential to keep the business
running. Though they are necessary to generate revenue, they are not associated
with production, therefore, they cannot be assigned to a product. They are charged
to the period in which they are incurred and are treated as expenses.

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Selling and administrative costs are treated as period costs for the following
reasons:
(i)Most of these expenses are fixed in nature.
(ii)It is difficult to apportion these costs to products equitably.
(iii)It is difficult to determine the relationship between such cost and the product.
(iv)The benefits accruing from these expenses cannot be easily established.

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Costs can be classified as fixed, variable and semi-variable
cost
Fixed Costs: The Chartered Institute of Management Accountants, London, defines fixed cost as “ the
cost which is incurred for a period, and which, within certain output and turnover limits, tends to be
unaffected by fluctuations in the levels of activity (output or turnover)”.
Fixed cost can be classified into the following categories for the purpose of analysis:
(a)Committed Costs: These costs are incurred to maintain certain facilities and cannot be quickly
eliminated. The management has little or no discretion in this cost, e.g., rent, insurance etc.
(b)Policy and Managed Costs: Policy costs are incurred for implementing particular management
policies such as executive development, housing, etc. Such costs are often discretionary. Managed costs
are incurred to ensure the operating existence of the company e.g., staff services.
(c)Discretionary Costs: These are not related to the operations and can be controlled by the
management. These costs result from special policy decisions, new researches etc., and can be eliminated
or reduced to a desirable level at the discretion of the management.
(d)Step Costs: Such costs are constant for a given level of output and then increase by a fixed amount at
a higher level of output. 10
Variable Cost: Variable costs are those costs that vary directly and proportionately
with the output e.g. direct materials, direct labour. It should be kept in mind that the
variable cost per unit is constant but the total cost changes corresponding to the
levels of output. It is always expressed in terms of units, not in terms of time.
Semi-fixed (Semi-Variable) costs: Such costs contain fixed and variable elements.
Because of the variable element, they fluctuate with volume and because of the
fixed element; they do not change in direct proportion to output. Semi-variable
costs change in the same direction as that of the output but not in the same
proportion. Depreciation is an example; for two shifts working the total
depreciation may be only 50% more than that for single shift working. They may
change with comparatively small changes in output but not in the same proportion.

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 Functional costs

(a) Manufacturing/production Costs: It is the cost of operating the manufacturing

division of an undertaking. It includes the cost of direct materials, direct labour,
direct expenses, packing (primary) cost and all overhead expenses relating to
production.
(b) Administration Costs: They are indirect and covers all expenditure incurred in
formulating the policy, directing the organisation and controlling the operation of a
concern, which is not related to research, development, production, distribution or
selling functions.
(c) Selling and Distribution Cost: Selling cost is the cost of seeking to create and
stimulate demand
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(d) Research and Development Costs: They include the cost of discovering new ideas,
process, products by experiment and implementing such results on a commercial basis.
(e) Pre-production Cost: When a new factory is started or when a new product is
introduced, certain expenses are incurred. There are trial runs. Such costs are termed as
pre-production costs and treated as deferred revenue expenditure. They are charged to the
cost of future production.

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 Applications of the Topic
5

• Budget Preparation
• Helps in forecasting fixed and variable costs for
accurate budget planning.
• Pricing Decisions
• Assists in setting product prices by
understanding direct and indirect cost
components.
• Cost Control and Efficiency
• Enables better monitoring and control of
overheads and operational costs.
Figure-2 :https://commercemates.com/importance-
management-accounting/
 Summary of the Lecture
6

• Cost classification is the process of grouping costs according to their

common characteristics for better analysis and decision-making. Costs
can be classified in several ways—by behavior (fixed or variable),
function (production, selling, administrative), traceability (direct or
indirect), and relevance (relevant or irrelevant). Understanding cost
classification helps managers allocate resources efficiently, prepare
budgets, set prices, and control expenses effectively.
 Next Lecture
7

Cost classification continues

 Quiz/ FAQ’s
8

• What is the difference between fixed and variable costs? Provide an example of
each.
• Why is cost classification important in managerial decision-making?
REFERENCES
• http://qu.edu.iq/ade/wp-content/uploads/2016/02/financial_management_ww
w.accfile.com_.pdf
• Maheshwari S.N. “Principles of Financial Management”, Sultan Chand &
Sons, New Delhi
• Kulkarni P.V. “Financial Management”, Himalaya Publishing House, Mumbai
• Google.com
• Wikipedia.org
• Studymafia.org
• Slidespanda.com

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 Faculty-curated videos, NPTEL,
10

Coursera, LinkedIn, or other relevant

learning resources
https://www.youtube.com/watch?v=QQd1_gEF1yM
Class-Wise Feedback
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Thank You
For queries
Email: akanksha.usb@cumail.in